Driving Investment in Commercial Mortgage–Backed (CMBS) Securities  

Over the past few weeks, the institutional investor market has been scooping up all the AAA, ten-year, “super senior” CMBS bonds it can as it prowls the debt capital markets in search of yield to fund payments to beneficiaries. One driver, for sure, is the continuing month-over-month improvement in CMBS delinquencies as reported by Trepp LLC and Fitch, as follows:

Trepp’s analysis showed the overall delinquency rate for CMBS declining 14 basis points in January 2013 to 9.57 percent—the lowest level since February 2012, when the rate was 9.38 percent.

“If the CMBS market was cycling, people would think that someone had dumped performance-enhancing drugs in the water cooler,” says Manus Clancy, senior managing director of Trepp. “New issue volume hit a five-year high in January; spreads on legacy AJ and mezzanine paper collapsed; pricing levels on new deals came in remarkably tight across the credit stack; and delinquency rates fell once again—all very positive signs for the market.”

Percentage 30+ Days Delinquent by Property Type

Jan-13

Dec-12

Nov-11

3 Months

6 Months

1 Year

Industrial

11.32

11.24

11.48

11.53

11.72

12.14

Lodging

11.77

11.73

12.24

11.24

13.06

12.09

Multifamily

13.43

13.98

14.21

14.26

15.69

15.39

Office

10.48

10.66

10.37

10.20

10.69

8.90

Retail

7.79

7.62

7.75

8.03

8.03

7.88

Overall

9.57

9.71

9.71

9.69

10.34

9.52

Source: Trepp, LLC.

Fitch’s delinquency index tracks Fitch-rated deals that are delinquent by at least 60 days or in foreclosure. An analysis of the Fitch data (see chart below) shows overall delinquencies declining 8 basis points between December 2012 (when 7.99 percent of the Fitch-rated universe was delinquent at least 60 days or in foreclosure) and January 31, 2013 (7.91 percent). On January 31, 2012, 8.32 percent of the Fitch-rated universe was at least 60 days delinquent or in foreclosure.

January 2013 (%)

December 2012

January 2012

Multifamily

9.73

10.12

13.04

Hotel

8.76

8.87

12.21

Industrial

8.69

8.61

10.40

Office

8.33

8.41

7.30

Retail

7.43

7.14

7.21

Overall

7.91

7.99

8.32

Source: Fitch.

Senior Loan Officer Opinion Survey

According to the Federal Reserve’s Senior Loan Officer Opinion Survey, banks loosened lending standards a bit  during the last months of 2012. In fact, analysts noted that the survey showed banks continuing to relax lending standards to both businesses and individuals during the last three months of 2012.

In regard to commercial real estate lending, a net 13.4 percent of the banks reported “easing in lending standards” over the past three months as well as a large increase in demand (net 37.8 percent) for commercial real estate loans.

The Ackman-Ziff Real Estate Group LLC Real Estate Capital Advisors Debt Market Sentiment and Lender Survey  

The following is a summary of portions of the Ackman-Ziff Real Estate Group’s recently released “Debt Market Sentiment and Lender Survey”:

  • ·         Lenders continue to be aggressive . . . for well-capitalized sponsors with quality real estate. . . . [While]  [re]development and construction capital is available, lenders are very selective.
  • ·         Broad appetite for “durable” cash-flowing assets [as well as] transitional, value-added, and development in primary markets with proven operators.
  • ·         Healthy market to finance note purchases and discounted pay-offs.
  • ·         Lenders remain focused on underwriting of tenancy, cash flow durability, market rents and occupancy statistics, lease rollover, and associated costs.
  • ·         Debt yield, debt-service-coverage ratios, and loan-to-value tests reverting to historic mean.
  • ·         Ample short- and long-term capital available to support debt capital market.
  • ·         CMBS aggressively seeking product for securitizations. Nonrecourse and higher leverage available in secondary and tertiary markets. Deep submarket for short- and long-term capital needs.
  • ·         Life insurance companies remain aggressive with sizable 2013 allocations; continue to focus on high-quality assets in primary markets. Five- to 20-year capital available.
  • ·         Foreign banks focused on institutional quality, cash-flowing stable assets in major markets for ‘best in class’ sponsors. Selective appetite for transitional assets.
  • ·         Money center banks are active and aggressive on cash-flowing assets, value-added and select development deals for strong sponsors.

Monday’s Numbers

The Trepp survey for the most recent period showed spreads narrowing an incredibly 10-plus basis points for the second week in a row as competition between conventional and securitized lenders continues unabated. As we seem to say each week, now is the time to lock in rates. Of course, each time we say it, rates decline another 10 basis points. I guess if we say it enough times we will eventually be right.

Asking Spreads over U.S. Treasury Bonds in Basis Points

(Ten-Year Commercial and Multifamily Mortgage Loans with 50% to 59% Loan-to-Value Ratios)

12/31/09

12/31/10

12/31/11

12/31/12

2/1/13

Month Earlier

Office

342

214

210

210

183

210

Retail

326

207

207

192

176

192

Multifamily

318

188

202

182

164

182

Industrial

333

201

205

191

172

191

Average Spread

330

203

205

194

173

193

10-Year Treasury

3.83%

3.29%

1.88%

1.64%

2.04%

1.89%

The Cushman & Wakefield Equity, Debt, and Structured Finance Group’s monthly survey of commercial mortgage spreads for the period ending January 31, 2013, showed spreads for ten-year, fixed-rate mortgages coming in approximately 20 basis points across all property sectors compared with the prior survey period. We seem to have entered the “limbo stick”—a period in which borrowers and lenders alike wonder “how low can they go.”

Property Type

Midpoint of Fixed-Rate Commercial Mortgage Spreads for Five-Year Commercial Real Estate Mortgages

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – nonagency

+270

+245

+200

+190

Multifamily – agency

+280

+255

+190

+190

Regional mall

+280

+300

+250

+240

Grocery-anchored

+280

+295

+245

+235

Strip and power centers

 

+320

+270

+260

Multitenant industrial

+270

+305

+250

+240

CBD office

+280

+310

+230

+220

Suburban office

+300

+320

+250

+240

Full-service hotel

+320

+350

+320

+310

Limited-service hotel

+400

+360

+330

+320

5-Year Treasury

2.60%

0.89%

0.76%

0.86%

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Property Type

Midpoint of Fixed-Rate Commercial Mortgage
Spreads for Ten-Year Commercial Real Estate Mortgages

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – nonagency

+190

+205

+180

+160

Multifamily – agency

+200

+200

+165

+160

Regional mall

+175

+245

+190

+170

Grocery anchor

+190

+240

+185

+165

Strip and power centers

 

+255

+205

+185

Multitenant industrial

+190

+245

+205

+185

CBD office

+180

+250

+180

+160

Suburban office

+190

+265

+205

+185

Full-service hotel

+290

+300

+250

+230

Limited-service hotel

+330

+310

+270

+250

10-Year Treasury

3.47%

2.00%

1.86%

1.97%

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Property Type

Midpoint of Floating-Rate Commercial Mortgage Spreads for Three- to Five-Year Commercial Real Estate Year Mortgages

12/31/10

12/31/11

12/31/12

1/31/13

Multifamily – nonagency

+250–300

+200–250

+180–250

+180–250

Multifamily – agency

+300

+220–265

+175–230

+175–230

Regional mall

+275–300

+250–350

+210–275

+210–275

Grocery-anchored

+275–300

+240–325

+210–275

+210–275

Strip and power centers

 

+250–350

+225–300

+225–300

Multitenant industrial

+250–350

+270–350

+210–275

+210–275

CBD office

+225–300

+275–350

+180–250

+180–250

Suburban office

+250–350

+300–350

+225–300

+225–300

Full-service hotel

+300–450

+375–475

+275–400

+275–400

Limited-service hotel

+450–600

+375–550

+325–450

+325–450

1-Month LIBOR

0.26%

0.30%

0.21%

0.21%

3-Month LIBOR

0.30%

0.58%

0.31%

0.30%

* A dash (–) indicates a range.

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Year-to-Date Public Equity Capital Markets

DJIA (1): +6.78%
S&P 500 (2): +6.43%
NASDAQ (3): +5.77%
Russell 2000 (4): 7.57%
Morgan Stanley U.S. REIT (5): +4.43%

 (1) Dow Jones Industrial Average. (2) Standard & Poor’s 500 Stock Index. (3) NASD Composite Index.

(4) Small Capitalization segment of U.S. equity universe. (5) Morgan Stanley REIT Index.

U.S. Treasury Yields

12/31/11

12/31/12

2/8/13

3-Month

0.01%

0.08%

0.07%

6-Month

0.06%

0.12%

0.11%

2-Year

0.24%

0.27%

0.25%

5-Year

0.83%

0.76%

0.84%

7-Year

 

1.25%

1.34%

10-Year

1.88%

1.86%

1.99%

                                                  

Key Rates (in Percentages)

 

Current

1 Year Prior

Federal funds rate

0.15

0.10

Federal Reserve target rate

0.25

0.25

Prime rate

3.25

3.25

U.S. unemployment rate

7.90

8.70

1-Month LIBOR

0.20

0.26

3-Month LIBOR

0.29

0.51